COVERAGE FAILURE

[Guest moltengater]

A staffing agency has a 401(k) plan which excludes hourly employees - (their temps) from participation in the plan. The hourly employees make up over 95% of the workforce.

The plan's eligiblity requirements are age 21 - no service & monthly entry.

I have disaggregated the plan into two groups - moving the otherwise excludable NHCE's - both salary and hourly into one group - which passes coverage becuase no HCE's are in the otherwise excludable group.

However, for the employes who met the statutory minimum requirements - both salaried and hourly - the plan does not pass coverage - the only contributions they make are 401(k) contributions.

40 employees in the the group who meet max age and service

9 salaried employees are HCE's and all are elgible - 100%

18 of 31 NHCE's are salaried = 58.06%

In the otherwise excludable group

0 salaried employees are HCE's

32 of 889 NHCE's are salaried employees = 3.60%

In reading the ERISA outline book (chapter 8- correcting the failure) I find two options to amend the plan for 2005:

Option 1 - provide a QNEC to enough hourly employees eqaul to the ADP of the NHCE's who were eligible to defer for that plan year to get the ratio percentage up to 70% - can I assume I have to use the ADP of the statutory eligible NHCE salaried employees, or do I have to use the ADP of all the eligible salaried NHCE's (including those disaggregated as otherwise excludable)

Option 2 - the plan does not use the failsafe language so I can use Average Benefit Testing and provide a QNEC to the statutory eligible salaried NHCE's to get the average benefit percent up to 70% as the plan passes the non-discriminatory classification test for the statutory employees.

I would prefer to use option #1 as it would be less costly but just want to be sure my logic is ok. Any thoughts would be appreciated.

[Mike Preston]

Have you run the average benefits test? I know it is a longshot, but one never knows. If so, and if it passes, then you pass coverage because your coverage percentage is well in excess of the safe-harbor percentage.

[Tom Poje]

my logic says it would be simply the average of the group you are looking at.

the -11(g) correction is to go to those employees who were not eligible.(they met the 1 year wait but were excluded for other reasons.

you have split the plan in two, and are treating the otherwise excludables as if they really weren't eligible (as if the plan had a 1 year wait)

[Guest moltengater]

I did run Average benefit test - it did not pass - too many HCE's putting in too much money - I plan to present them with the two options. Passes non-disc. class test but APB too low.

1. QNEC eqaul to percent of Salaried NHCE's to enough hourly employees to pass ratio testing - which is less expensive than option 2

2. QNEC to salaried NHCE's to raise ABP to 70% - which would keep hourly employees out of plan but is more expensive.

Thanks for the help!

[ak2ary]

Did you run the ABT on a benefits basis?